More than $128 billion in cryptocurrency market capitalization was wiped off in a matter of hours on Thursday after Bitcoin crashed eight percent, CNBC reported. Other crypto coins, ether and XRP, also saw sharp declines during this period.
Barely six months ago, Bitcoin was enjoying its historic high against the US dollar, and together cryptocurrencies were enjoying market capitalization that was leaving tech companies, including Apple, behind. That reality now sounds like a distant dream, with fears of a Bitcoin crash coming, even as the crypto coin trades at nearly half of its peak value.
Why is Bitcoin crashing?
For all the talk about opening doorways to decentralized finance, Bitcoin has become an asset that responds to perturbations of the current financial system. Analysis of macroeconomic trends over the years has shown that Bitcoin valuation behaves quite like Nasdaq stocks. Not because Bitcoin is linked to them, but because it falls into the same category of assets as stock, and monetary policies have a similar bearing on Bitcoin as they do at Nasdaq.
Earlier this week, when the U.S. Federal Reserve was expected to announce a tightening of its monetary position, crypto experts warned that Bitcoin could also come crashing down. While this was done on Wednesday, cryptocurrencies and stock markets saw a slight surge in value after the Fed dismissed rumors of a further increase in interest rates, CoinDesk reported.
However, the next day, the real impact of the Fed's decision to increase interest rates by 50 basis points was seen on Thursday, as Bitcoin crashed by as much as eight percent.
Where will Bitcoin go next?
Experts think that the Bitcoin slide to $36,251 seen on Thursday is not the whole picture, and the crypto coin could drop further in the coming days. The cryptocurrency may have fallen below a critical level when it crossed $37,500, and this could test its valuation to new lows, with a valuation of $25,000 also being a possibility. These plunges are fuelled by fears that future Fed moves to counter inflation might push the U.S. markets towards a recession.
If it is any solace for crypto enthusiasts, Nasdaq dropped by nearly 5 percent, and S&P500 lost almost four percent valuation the day Bitcoin slumped.